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UFS Chapter 1

Financial Statements: An Overview
by

Doug Kulper

on 31 March 2018

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Transcript of UFS Chapter 1

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(cc) photo by theaucitron on Flickr
(cc) photo by theaucitron on Flickr
copy paste branches if you need more....
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(cc) photo by theaucitron on Flickr
(cc) photo by theaucitron on Flickr
copy paste branches if you need more....
Financial Statements: An Overview
Chapter 1:
Financial statements have the potential for being both map and maze
As a Map
Form the basis for understanding the financial position of a firm, presents clear representations of a firm’s financial health
As a Maze
Overwhelming amount of information, unreliable auditing, constantly changing and complex policies and reporting requirements, considerable discretion given to management, key information hidden or omitted
The main objectives of this book are to:

ensure that financial statements serve as a map, not a maze,

demonstrate how to read and evaluate financial statements,

provide the tools and techniques needed to complete a comprehensive financial statement analysis, and

encourage intelligent decision making.
Useful Information
Financial position
Success of operations
Policies and strategies of management
Insight into future performance
Volume of Information:
Financial Statements
Notes to the Financial Statements
Auditor's report
Five-year summary of key financial data
High and low stock prices
Management's discussion and analysis of operations
Other material
Financial Statements
Balance Sheet
Income Statement
Statement of Stockholders' Equity
Statement of Cash Flows

Financial Reporting Reforms
SOX Title I- Public Company Accounting (PCAOB)
SOX Title II- prohibits nonaudit services during an external audit
SOX Title III and IV- corporate responsibility
SOX Title IX- harsh penalties for violations
Notes to the Financial Statements
Integral part of the statements
Summary of the firm's accounting policies
Details about particular accounts
Other supplementary information
Auditor's Report
Attests to the fairness of the presentation of financial statements
Sarbanes-Oxley (SOX) Act of 2002
Types of reports:
Unqualified, Qualified, Adverse Opinion, Disclaimer of opinion, Unqualified opinion with explanatory language
MD&A
Sometimes labeled financial review
Coverage of favorable or unfavorable trends, events, and/or uncertainties in areas of liquidity
Capital resources
Results of operations
Companies do a good job of describing historical events
Very few firms provide accurate and meaningful forecasts
Five-year Summary of Selected Financial Data and Market Data
Net sales or operating revenues
Income or loss from continuing operations per common share
Total assets
Long-term obligations and redeemable preferred stock
Cash dividends per common share
Two years of high and low common stock price by quarter
Pandora (a.k.a. "PR Fluff)
Colored photographs
Charts
Shareholders' letter from the CEO
Other items to make the report attractive
Proxy Statement
Used to solicit shareholder votes
Important in assessing
Who manages the firm
How management is paid
Conflict of interest issues
Missing and hard to find information
Employee relations with management
Morale and efficiency of employees
Reputation of the firm
Firm's prestige in the community
Effectiveness of management
Provisions for management succession
Potential exposure to regulation changes
Publicity in the media
Companies operating in several lines of unrelated business
Where to find a company's financial statements
Form 10-K
Filed annually with the SEC
Same order for all filing companies
Electronic Data Gathering, Analysis and Retrieval (EDGAR)
Annual report
Financial statements
Public relations material
Sent to shareholders and prospective investors
Corporate website
Complexities
Accounting Choices
Management discretion in application of regulations
Differing accounting methods
Financial data appropriated to certain accounting periods
Anticipated Changes due to FASB/IASB joint projects
Anticipated changes in several areas
Lease accounting
Classification of financial instruments
Inventory accounting
Revenue recognition
Reformatting of financial statements
Quality of Financial Reports
Many opportunities for management to affect quality
Timing of revenue and expense recognition
Discretionary items
Full transcript